Policy | Research | Media

Pipe dreams

Politics and economics have always had an abusive relationship in Lebanon, with the latter habitually falling victim to the former’s unpredictable behavior. Like any odd couple, there are times when they get along, if only to fall back into a vicious cycle that consumes them both.

As 2010 began there was optimism in the air; the country had just emerged with a new government after Lebanon’s power brokers finished their long and drawn-out game of musical chairs over who would take which cabinet posts.

The new cabinet of “national unity” effectively meant, however, that basic national issues could not be decided upon without unanimous approval. Even without this inherent impediment to the kind of streamlined decision-making Lebanon desperately needed after years of (at best) ineffective government, results were going to take time. Many of the problems facing the country, from electricity shortages to water supply, require long-term solutions rather than quick fixes.

At the start of 2010, the cabinet approved a new ministerial statement that has since remained the only wide-ranging plan to address the country’s problems, with the stated goal: “to help all Lebanese benefit from economic growth in a proportional way that will allow all categories of society and all the Lebanese regions to profit.” The final part of the statement contains the priorities of each ministry, though most are vague enough to allow the ministers to evade accountability for tangible results.

While no one expected all elements of the ministerial statement to be fulfilled in the first year of operation, the pace of most reform in 2010 has been glacial.

“They didn’t do anything. Really, nothing happened,” says Jad Chaaban, acting president of the Lebanese Economic Association in November. “There are people who don’t want to rule with others on both sides. There are huge differences on how reform should be carried out and there is no real debate on these issues, from traffic, to electricity to water.”

The lack of action is even more unfortunate given that the new government was regarded by many as the first that could actually make some headway in terms of public policy, after previous post-Hariri assassination governments were plagued by political debacles that brought policy to a grinding halt.

Electricity

To be fair, some progress has been made this year, even if it was only at the planning level. Perhaps Lebanon’s most glaring policy deficiency is the abysmal state of the electricity sector, and in June the cabinet approved a comprehensive plan for an overhaul, which aims to provide 24-hour power throughout the country by 2015. It is not the country’s first electricity overhaul plan, though it may the most substantial to date.

Much of its success banks on the private sector, which will be asked to contribute $2.32 billion, or 58 percent of the total cost, to take part in the production and distribution of electricity, while the public sector will retain the infrastructure and control the transmission of electricity from plants to local districts. This collaboration, however, will require a Public Private Partnership (PPP) law to be passed by Lebanon’s parliament, which has barely managed to meet since being elected in June 2009, much less pass essential legislation.

“Clearly there is an interest from the private sector, given a proper PPP law that preserves the interests of the private parties involved, but the key aspect is a transparent, clear and implementable law that has to be very clear on how to solve issues between the private sector and the government,” says Nassib Ghobril, head of economic research and analysis at Byblos Bank.

With the draft law still swirling around parliament, and the latest draft viewed by Executive only referring to “the principles of transparency and equality among competitors,” rather than any mechanism for resolving conflicts, the Lebanese could be waiting some time for a resolution to their chronic energy problems.

Water

Another sector that needs a substantial overhaul is water. A draft strategy is currently being compiled by the Ministry of Energy and Water, which is expected to be ready for submission to cabinet by the end of the year. A supply/demand forecast was completed and presented to domestic and international stakeholders in November, giving some idea of the amount of money that will need to be spent to close the gap in the coming 25 years. New storage alone, mostly in the form of dams and artificial lakes, will require around $2.65 billion in capital expenditures and then some $96 million each year in operating costs. Capital expenditures on transmission and distribution are projected to cost $875 million by the end of 2015, with associated operating costs at $249 million over the same period. New irrigation networks are expected to cost a further $1 billion over the next decade and beyond. Wastewater clocks in at another $1.6 billion by 2020.

Telecommunications

Lebanon’s government-owned telecoms sector is also in need of radical reform. Theoretically, the sector already has a framework that should be implemented in the form of Law 431, which calls for the creation of a corporatized, but not necessarily privatized, entity called Liban Telecom. Under the law, the telecom ministry’s assets would be transitioned to the company, which would be regulated by the existing Telecom Regulatory Authority that presently regulates around 5 percent of the market under its legal mandate. The liberalization of the sector is also called for in the ministerial statement, but when Executive asked Telecom Minister Charbel Nahas why no action has been taken on this front he replied: “I am part of a large governmental block, so don’t talk to me about when to apply the law.”

Nahas had also promised to publish his policy for the sector within one year of taking office in November 2009, but has failed to do so.

“The ministry’s policy is not a matter of a statement, it is a matter of practice,” said Nahas when asked when he expected to issue his policy for the sector.

Official policy or not, some progress may be in the works. The Ministry of Finance recently advanced $66.3 million to the Ministry of Telecoms to begin its proposed project to lay a new fiber-optic ‘backbone’ across the country. At the end of November, the telecom minister said the project would begin “within a few days or weeks.”

The project was awarded to Alcatel and the local civil engineering firm Consolidated Engineering and Trading, budgeted at $40 million; the telecom ministry has announced that the project should be ready by March 2012. According to Nahas, 4 to 6 percent of gross domestic product comes from the telecom sector surplus, adding that “it is the least of our duties to give back to the population and to the economy this very small part of this huge rent extortion that we inherited from the past period.”

Improved Internet access will require that the $45 million international IMEWE3 cable becomes operational. It was planned for March 2010, but Egypt has not opened up access on its end in Alexandria (where the cable connects to the rest of the world), due to reluctance on the part of the Egyptian security services, according to Riad Bahsoun, telecom expert at the International Telecommunications Union (ITU).

The debt

But perhaps the most pressing item on the government’s agenda is its largest source of expenditure: the public debt. It is projected to have cost the government $4 billion just to meet interest payments in 2010, with the principal reaching $50.85 billion, around one and a half times estimated economic output.

Finance Minister Raya Hassan admits that there is no foreseeable plan to reduce this principal in the absence of privatization of the telecoms sector, which she herself has said is undervalued on international markets.

Her debt strategy is to switch short-term debt for long-term debt now that Lebanon is enjoying better rates than it has before, and maintain a primary surplus as a “cushion” against debt obligations. “It’s a mixed blessing because even though the debt increase is going to be controlled, on the other side you are not going to have all the capital expenditures that would unleash the full potential of the Lebanese economy,” she says.

The lack of a government budget for the last half decade has created a situation where opening and closing accounts for the years ending 2005 and 2006 do not add up. The issue created a hubbub of accusations over mismanagement of public funds at the end of 2010.

“What they [the opposition] are trying to imply is that there are no accounts. That is totally untrue. There are accounts,” says Hassan. “What is lacking is the auditing. It’s not even auditing, it’s the control of the accounts by the Public Accounting Directorate (PAD),” she says, adding that, because public accounting laws are so old, the PAD has to cross-check around two million transactions a year with their supporting documents, which they are not able to do in any reasonable amount of time. “What we lack is a proper internal audit function — not a control function — and therefore at this point there should be a review of the laws themselves.”

Without modern laws or infrastructure spending on sectors such as telecom and electricity, Hassan and her ruling party’s platform — of relying on growth to spur jobs and keep the debt looking respectable as a decreasing proportion of GDP — look to be in serious danger of failing, especially as the economy has now started a natural downturn. “We are now at a crossroads; to sustain high growth we must invest in infrastructure,” says Mazen Soueid, head of research at BankMed, which is owned by the prime minister’s family.

As Executive went to print in late November 2010, the cabinet had halted its weekly meetings because of political tensions over the Special Tribunal for Lebanon. Parliament had only managed to pass two piecemeal laws, one covering oil and gas exploration — without fleshing out the regulatory requirements or handling the touchy subject of a Sovereign Wealth Fund — and the other a reform of Palestinian refugee rights that maintains the ban on Palestinians owning property or being employed in some 30 professions.

All of this hardly encourages optimism. “Bottom line, I’m not happy with the way things are run as a tax payer,” says Chaaban. “We are still waiting for a push by those who are conscious of these issues to put them on the table.”

But are the country’s policy makers even aware of the gravity? “They don’t know and they don’t care,” concludes Chaaban.